Irish Deal Simply Recycles Zombie Debts

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01/04/2012 19:18 BST
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Updated
30/05/2012 10:12 BST

Ireland's complex proposal for renegotiating its debts today recalls the many years of debt restructuring experienced by Third World countries over the last three decades. Far from giving those countries a fresh start, these negotiations kicked the problem down the road.

So will the debt negotiations in Ireland. Ireland has been brought to its knees by a debt, which originated not with excessive public spending, but a footloose financial sector that gambled with the future of the country. Standing astride Ireland's notorious property bubble is the Anglo Irish bank - which lent money to rich speculators to inflate a property bubble.

When the bubble burst, the Irish government foolishly agreed to guarantee the bank. Economics professor Morgan Kelly said at the time that both Anglo and Irish Nationwide, which was also underwritten, "were purely conduits for property speculation. They fulfil no role in the Irish economy." Anglo is believed to have 15 customers who owe the bank more than €500m each.

Today Anglo Irish, now rebranded as the Irish Bank Resolution Corporation, is a zombie bank - it only exists to repay debts. It will not become a viable bank again and its existence does not benefit the Irish economy. Nonetheless, over €8bn has been paid by the Irish government to Anglo's secret investors, even though many of these bondholders fuelled Ireland's speculative economy.

The bondholders were paid thanks to new 'bail-out' loans. Now Ireland has to 'repay' a series of 'promissory notes' - IOUs which are pumped back into the zombie banks, and effectively removed from circulation. Much needed money is effectively destroyed.

The money being discussed is not small change. In the coming 20 years, these debts will cost Ireland at least €47.9bn - and probably much more given the state will have to borrow further money to repay it. The real cost will be borne most heavily by Ireland's poorest - who are neither responsible for, nor benefited from, the financial bubbles these speculators inflated. Swingeing budget cuts mean a reduction in the minimum wage and, as a direct result, an economic contraction of 15%, with 15% unemployment.

The problem is that deferring payment is not the same as not paying. Essentially the Irish government will contract further debt which will actually be more difficult to default on then would the promissory notes.

This will be familiar to many countries in Latin America and elsewhere. It is nearly 30 years since Mexico defaulted on its debt - an event that sent the international financial system into panic and threatened a domino default across the region. Latin America's debts were unpayable, but the solution offered by Washington and their banks was simply to lend more money - preventing a default today by creating more debt tomorrow. Despite massive interest payments, debts boomed across Latin America. What's more, the fact that much of Latin America's debt was deeply odious - having been lent to the military juntas of the 1970s to arms themselves with a repressive infrastructure built by the West - was recycled into new, cleaner loans.

This process is at work in Ireland today. As Andy Storey, chair of campaign group Action from Ireland (Afri), puts it: "This is a stitch up, making it harder for us to write down this illegitimate debt in the future." Not only will the new debts conceal their unjust origins, they will literally be harder to refuse payment on. Storey points out that a simple refusal to pay today's 'promissory notes' would not have constituted a sovereign default, whereas cancelling the newly contracted debt would constitute a default.

In other words, the problem has not only been 'kicked down the road' but it has made it even harder to take the necessary step - simply dropping debts which are both unjust and unpayable. As Irish lecturer Marie Moran says "far from solving the problem, we are digging ourselves into a hole here".

But there is hope. It has taken some time for activists to start gaining the momentum required to fight against the injustice of financial tyranny. There seems little doubt that the work of Debt Justice Action has been instrumental in shifting politics on the debt - the Anglo: Not Our Debts campaign has brought together think-tanks, community groups, trade unions and international campaigns to call for a suspension of zombie bank payments.

Irish campaigners should be supported because they are - like the Greeks - at the sharp end of a financial system which has caused huge suffering in the name of big profits.

The European Commission, never known for its democratic credentials, has firmly sided with big finance over the people of Europe. When Ireland's deferral was first mooted, EU Commissioner Olli Rehn said "I actually wonder why this has to be asked at all. The principle in the European Union and the long European legal and historical tradition is, in Latin, pacta sunt servanda - respect your commitments and obligations."

We need a jubilee - cancellation of debts, radical financial reform and tax justice - to exit the profound crisis of democracy whereby European statesmen believe their job is to hold Europe's people to account to Europe's banks. Democracy in Europe, as everywhere, depends on breaking out of the straightjacket of finance.